Euro Drops to One-Year Low as S&P Cuts Spain’s Debt Rating

By Ben Levisohn

April 28 (Bloomberg) -- The euro dropped to a one-year low against the dollar as Standard & Poor’s cut the debt rating of Spain in a sign the European deficit crisis is spreading.

European Central Bank Jean-Claude Trichet said at a press conference the stability of the “euro zone is impacted” and Germany’s Chancellor Angela Merkel told reporters the nation accepts its responsibility to support the euro.

“There’s a tremendous amount of uncertainty at the moment,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “The euro should break below $1.30.”

The euro fell 0.4 percent to $1.3122 at 12:02 p.m. in New York, from $1.3175 yesterday, after touching $1.3117, the lowest level since April 2009. The euro advanced 0.4 percent to 123.33 yen, from 122.88. The dollar appreciated 0.8 percent to 93.98 yen, from 93.26.

International Monetary Fund Managing Director Dominique Strauss-Kahn told German lawmakers that Greece may need as much as 120 billion euros ($158 billion), Green Party spokesman Michael Schroeren said today.

That’s almost three times the 45 billion euro value of the aid package initially proposed. Germany may be able to make a final decision on aid for Greece as soon as May 7, when the upper house of parliament mamy approve a support package, Finance Minister Wolfgang Schaeuble said.

Spain’s credit rating was cut to AA from AA+ by Standard & Poor’s Ratings Services. The outlook is negative, S&P said.

Euro Below $1.32

The 16-nation currency fell below $1.32 yesterday for the first time in a year after Standard & Poor’s cut Greece’s credit rating to junk and lowered Portugal’s to the third-lowest investment grade.

Futures on the CME Group Inc. exchange showed a 63 percent chance the Federal Reserve will raise its target lending rate by at least a quarter-percentage point by its December meeting, down from 76 percent odds one month ago.

All of the 102 economists in a Bloomberg News survey predicted the central bank will hold the fed funds target at zero to 0.25 percent at its two-day meeting ending today.

Sterling dropped as much as 0.8 percent to $1.5145, the lowest level since April 8, after a former Bank of England policy maker, Timothy Besley, said in an interview with Bloomberg Television that Britain’s economy remains in a “fragile state” and that inflation should stay under control.

The U.K.’s economy grew in the first quarter at half the pace of the previous three months, intensifying an election squabble on how long to maintain stimulus.

Bank of England

The Bank of England kept its benchmark interest rate at a record low 0.5 percent this month to aid the recovery even as some officials expressed concern at the prospect of a prolonged bout of faster inflation.

Australia’s dollar rose from a four-week low on speculation accelerating inflation will prompt the nation’s Reserve Bank to raise the 4.25 percent benchmark cash target rate next week.

The consumer price index almost doubled to 0.9 percent in the first quarter after a 0.5 percent increase in the last three months of 2009, the statistics bureau reported today. The median forecast of 22 economists in a Bloomberg News survey was for a 0.8 percent advance.

The Aussie gained as much as 1 percent to 92.50 U.S. cents after touching 91.36 U.S. cents yesterday, the lowest level since March 31.

New Zealand’s dollar appreciated 0.8 percent to 71.69 U.S. cents on speculation the central bank will indicate at a policy meeting tomorrow that it will start raising borrowing costs from a record low.

New Zealand’s Rate

The Reserve Bank of New Zealand will keep its official cash rate unchanged at 2.5 percent tomorrow, according to all 14 economists in a Bloomberg News survey. Central bank Governor Alan Bollard said on March 11 he expected to begin raising borrowing costs at about the middle of the year.

Brazil’s real rose the most in almost a month on speculation the central bank will begin the most aggressive cycle of interest-rate increases since President Luiz Inacio Lula da Silva took office in 2003.

The currency gained 0.4 percent to 1.7649 per U.S. dollar after earlier appreciating as much as 1.1 percent to 1.7523 in the biggest intraday gain since March 29.

Twenty-three of 54 economists in a Bloomberg News survey expect policy makers to raise the benchmark interest rate by 0.75 percentage point from a record low 8.75 percent.

To contact the reporter on this story: Ben Levisohn in New York at blevisohn@bloomberg.net

Last Updated: April 28, 2010 12:09 EDT